January 2015 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment increased by 257,000 jobs in January -- better than expectations of 230,000. Meanwhile, the unemployment rate (based upon the BLS’s household survey) ticked up by 0.1 percentage point, to 5.7% as more potential workers entered the labor force.

Although the overall tone of the report is positive, it is difficult to determine how much of the improvement is “organic” how much is statistical. The January report is notoriously noisy: Many of the flood of retail workers hired for the holidays are being let go; in addition, the numbers are subject to not only the “usual” monthly adjustments from the BLS’s business “birth/death” model, but also new seasonal adjustments that flow from re-benchmarking work the BLS undertakes annually to account for population changes. Taking into account all of the changes, employers now are estimated to have created 3.116 million jobs -- up 164,000 over the previous estimate of 2.592 million; 147,000 of the 164,000 were added to the data for November and December 2014.

As for other observations from the employment report:

• The disparity between the establishment survey (+257,000 jobs) and the household survey (+453,000 jobs) was relatively modest in January.
• Virtually all private super-sectors of the economy saw employment gains last month. Of particular interest, construction added 39,000 jobs and 22,000 in manufacturing. On a less-positive note, the number of bartenders and restaurant wait staff rose to 10.946 million (+35,000) -- continuing the trend toward convergence with the number of manufacturing jobs (12.330 million). 

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• For example, the employment-population ratio finally edged up by 0.001% after holding steady at 0.592 during the previous three months. The number of employment-age persons not in the labor force dropped back to 92.5 million (-354,000). Moreover, the 55-and-over age cohort achieved yet another all-time high of almost 33.0 million workers in January; that cohort outnumbers the next-largest (45-to-54 years) by 237,000. 

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• The labor force participation rate rose 0.2 percentage point (to 62.9%), but hovered near its multi-decade low of 62.7%. Average hourly earnings of all private employees jumped by $0.12 (the largest gain since June 2007), resulting in a 2.2% year-over-year increase (the largest 12-month gain since December 2012). For all production and nonsupervisory employees (pictured above), wages rose by $0.07/hour (+2.0% YOY). With the CPI running at an official annual rate of 0.8%, wages are technically keeping up with price inflation. 

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• Finally, full-time jobs increased (+777,000) along with part-time jobs (+40,000). Full-time jobs have been trending higher since December 2009, but have yet to recapture the pre-recession high. Part-time jobs, by contrast, have been stuck in a channel between roughly 27 and 28 million.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

December 2014 Manufacturers’ Shipments, Inventories, and New & Unfilled Orders

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According to the U.S. Census Bureau, the value of manufactured-goods shipments decreased $5.3 billion or 1.1% to $488.2 billion in December. Shipments of durable goods increased $3.2 billion or 1.3% to $247.4 billion, led by transportation equipment. Meanwhile, nondurable goods shipments decreased $8.5 billion or 3.4% to $240.8 billion, led by petroleum and coal products. Wood and Paper shipments rose by, respectively, 0.9 and 0.8%. 

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Inventories decreased $2.0 billion or 0.3% to $653.9 billion. The inventories-to-shipments ratio was 1.34, up from 1.33 in November.

Inventories of durable goods increased $1.8 billion or 0.4% to $410.5 billion, led by transportation equipment. Nondurable goods inventories decreased $3.8 billion or 1.5% to $243.4 billion, led by petroleum and coal products. Inventories of Wood and Paper expanded by, respectively, 0.2 and 0.3%. 

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New orders decreased $16.4 billion or 3.4% to $471.5 billion. Excluding transportation, new orders decreased 2.3% -- the seventh drop in the last eight months. Durable goods orders decreased $8.0 billion or 3.3% to $230.6 billion, led by transportation equipment. New orders for nondurable goods decreased $8.5 billion or 3.4% to $240.8 billion.

Prior to July 2014, as can be seen in the graph above, real (inflation-adjusted) new orders had been essentially flat since early 2012, recouping roughly 75% of the losses incurred since the beginning of the Great Recession. With July’s transportation-led spike now in the rearview mirror, new orders have dropped back to around 55% of their December 2007 high. 

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Unfilled durable-goods orders decreased $9.4 billion or 0.8% to $1,166.9 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.69, down from 6.81 in November. Real unfilled orders, which had been a good litmus test for sector growth, show a much different picture; in real terms, unfilled orders in June 2014 were back to just 79% of their December 2008 peak. Real unfilled orders jumped to 102% of the prior peak in July, thanks to the largest-ever batch of aircraft orders, hence, this metric is likely to remain elevated for several years.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

January 2015 ISM and Markit Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that growth of economic activity in the U.S. manufacturing sector slowed again in January. The PMI retreated from December’s 55.1% (originally 55.5%) to 53.5% in January -- its lowest reading since March 2014 (50% is the breakpoint between contraction and expansion). Expectations had centered around 54.5%. ISM’s manufacturing survey represents under 10% of U.S. employment and about 20% of the overall economy. All sub-indices except inventories and imports were lower in January.

“Comments from the panel indicate that most industries, but not all, are experiencing strong demand as 2015 kicks off,” said Bradley Holcomb, chair of ISM’s Manufacturing Business Survey Committee. “The West Coast dock slowdown continues to be a problem, negatively impacting both exports and imports as well as inventories.” 

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Wood Products expanded in January, although supporting changes in the sub-indices were limited to inventories and backlogged orders. Increasing new orders, production and employment were sufficient to put Paper Products into expansion category. The port slowdown mentioned above figured prominently in respondent comments. “Chinese New Year, West Coast port dock slowdowns, coupled with railroad embargo are all creating logistical challenges and increased backlog of orders,” wrote one Wood Products respondent. “West Coast port slowdown is getting serious,” added a Paper Products respondent. “Mill has 40+ days of production at the ports and various warehouses.”

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- managed to eke out a small gain in January. The NMI registered 56.7%, 0.2 percentage point above December’s 56.5% (originally 56.2%). The sub-indices were generally higher than in December; notable exceptions included employment, input prices and imports. “Comments from respondents vary by industry and company,” said Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee; “however, they are mostly positive and/or reflect stability about business conditions.” 

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Two of the three service industries we track (Real Estate and Construction) reported contraction in January; in both cases the drop-off in new orders (along with employment in the case of Construction) negated the countervailing impacts of other sub-indices. The comment from one respondent that “construction demand is growing” apparently was not representative of the entire industry.

Relevant commodities up in price included uncoated freesheet; lumber: pine, spruce, treated. Natural gas; paper; and propane were down in price. Some reported fuel (both gasoline and diesel) as cheaper, others as more expensive. No relevant commodities were in short supply.

ISM’s and Markit’s surveys were largely in agreement in January. Whereas ISM’s PMI reflected decelerating growth, Markit’s U.S. Manufacturing PMI was unchanged; ISM’s NMI and Markit’s U.S. Services PMI both showed modestly accelerating activity.

“Manufacturing continued to expand in January,” said Chris Williamson, Markit’s chief economist, “but the sector remains in a lower gear compared to that seen last summer. Factory output growth and job creation remain well below last year’s peaks, adding to the suspicion that the pace of economic expansion in the first quarter could even fall below the 2.6% rate seen in the final quarter of last year.

“The strong dollar is hurting the competitiveness of exports, and the weak oil price is already resulting in weaker demand for investment goods from the energy sector. However, low oil prices are also helping to cut manufacturing costs, which fell for the first time in two-and-a-half years, and should also help boost consumer spending power, driving economic growth high.

“The fear is that the economy will become increasingly reliant on the consumer to sustain growth, which is another reason besides the economic slowdown to believe that policymakers will be wary of raising household’s borrowing costs via rate hikes any time soon.”

Summing up the U.S. Services PMI report, Williamson said, “Markit’s U.S. PMI surveys accurately anticipated the near-halving in the pace of economic growth in the fourth quarter of 2014, and suggest that the rate of expansion remained little better than 2.0% annualized at the start of 2015.

“Companies are clearly struggling at the moment, with the surveys recording the smallest increase in new orders seen since the financial crisis six years ago amid weaker US and global economic growth and the strong US dollar.

“However, the survey also found that companies remained in hiring mode, pointing to another robust non-farm payroll gain in January. At the same time, cost pressures hit a post-crisis low due to the oil price rout, which should pave the way for further falls in headline inflation in coming months.

“Irrespective of the employment gain, the combination of lower inflation and slower economic growth suggests that any lifting of interest rates before mid-year is looking increasingly unlikely.”

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

January 2015 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil extended its retreat for a seventh month, plunging by $11.63 to $47.97 per barrel; that is the lowest price since March 2009. The price drop coincided with a strengthening U.S. dollar, the lagged impacts of a 424,000 barrel-per-day (BPD) decrease in the amount of oil supplied/demanded in November (to 19.0 million BPD), and a dramatic accumulation of crude oil stocks (to the highest levels since 1982). The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI narrowed by $2.73 in January, to $0.31 per barrel. 

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Because prices of near-term futures contracts stabilized in January while prices for later contracts are retracing upward moves, we do not expect significant additional fallout in spot oil prices. 

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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

December 2014 U.S. Construction Spending

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Overall construction spending in the United States rose by 0.4% during December (against expectations of a 0.7% increase), to a seasonally adjusted and annualized rate (SAAR) of $982.1 billion. Private construction spending edged up 0.1%, with outlays for power projects falling 1.0% and spending on transportation dropping 1.4%. Outlays on residential projects rose 0.3%. Residential spending was lifted by gains in both single- and multi-family homes as well as renovations. Spending on public construction projects increased 1.1% in December, and continues to be much stronger than the private sector. 

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Click here for a discussion of December’s new residential permits, starts and completions. Click here for a discussion of new and existing home sales, inventories and prices.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

January 2015 Currency Exchange Rates

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In January the monthly average value of the U.S. dollar appreciated against two of the three major currencies we track: 5.1% against Canada’s loonie and 6.1% relative to the euro; the greenback depreciated (0.9%) unexpectedly against the yen. On a trade-weighted index basis, the dollar strengthened by 2.1% against a basket of 26 currencies. 

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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

4Q2014 Gross Domestic Product: First (Advance) Estimate

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According to the Bureau of Economic Analysis’ (BEA) “advance” estimate, 3Q2014 growth in real U.S. gross domestic product (GDP) was pegged at a seasonally adjusted and annualized rate of 2.6% -- or 2.4 percentage points lower than 3Q’s 5.0%. Analysts had expected a more modest decline to 3.2% (ranging from +2.2 to 3.5%). Personal consumption expenditures (PCE) and private domestic investment (PDI) contributed to 4Q growth, while net exports (NetX), and government consumption expenditures (GCE) subtracted from it.

The 4Q headline was cut nearly in half relative to 3Q by imports (-1.55%), exports (-0.24%), government spending (-1.20%), and fixed investment (-0.84%). Inventory growth (+0.85%) and consumer spending (goods: +0.14%; services: +0.52%) were the only bright spots. As we have frequently pointed out in the past, however, “what inventories give now, they take away in the future” unless the economy is in the midst of sustained and robust growth. Also, a majority of consumer spending on services was concentrated in healthcare -- including insurance premiums, whose connection to the real economy is somewhat tenuous. 

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Consumer Metrics Institute made an interesting observation:

“As mentioned last quarter, plunging energy prices are likely playing havoc with many of the numbers in this report. U.S. at-the-pump gasoline prices fell 33% quarter-to-quarter -- pushing all consumer oriented inflation indexes firmly into negative territory. During 4Q (i.e., from October through December) the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was solidly dis-inflationary at a -2.47% (annualized) rate, and the price index reported by the Billion Prices Project (BPP) was significantly more dis-inflationary, dropping [at] an astounding -8.30% annualized rate during the quarter.

“Yet for this report the BEA still assumed a very mildly dis-inflationary annualized deflator of only -0.09%. The disparity between the BEA’s and the BLS’s deflators raises some serious consistency issues. Over reported inflation (or underreported dis-inflation) will result in a more pessimistic growth data; if the BEA’s nominal numbers were corrected for inflation using the line-item appropriate BLS consumer and producer price indexes, the economy would be reported as growing at an implausibly high 7.17% annualized rate. Clearly the BEA’s deflator is troubling, but using the more reasonable deflators from the BLS generates nonsensical growth rates when applied to the BEA’s nominal data; this suggests the BEA's initial nominal data may be more overstated…than reasonable deflators can handle.”

We would observe that the BEA’s GDP deflator typically “travels” in the midrange of the BLS’s CPI, so it will be interesting to see if the CPI turns higher in subsequent quarters.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.